Reducing Medicare Spending Through Electronic Information Exchange: The Role of Incentives and Exchange Maturity

Abstract

Health information exchanges (HIEs) are entities that have emerged in healthcare delivery markets across the U.S. They enable the electronic sharing of patient information between disparate and fragmented healthcare providers and other stakeholders. HIEs are a type of inter-organizational information system (IOIS) – a technology infrastructure that permeates diverse industries (e.g. EDI, B2B exchanges) – and are intended to improve the quality and efficiency of care. Significant questions persist as to the extent of these benefits in practice, particularly in terms of reducing healthcare spending. We use transaction cost economics (TCE) to theorize that reductions in healthcare spending from HIEs will be pronounced when (1) incentives for payers and providers align and (2) HIE capabilities mature. We are able to test these conjectures because HIEs, unlike traditional IOIS, are typically confined to regional markets and develop heterogeneously between these markets, introducing variation in market incentives and HIE maturity. Leveraging a unique national panel dataset, we evaluate whether HIEs reduce spending for the largest insurer in the U.S. – Medicare – and whether incentives and HIE maturity modify the magnitude of reductions. We find significant cost reductions in healthcare markets that have established operational HIEs, with an average reduction in spending of $139 (1.4% decrease) per Medicare beneficiary per year. We also find that these reductions occur disproportionately in healthcare markets where providers have financial incentives to use an HIE to reduce spending and when HIEs are more mature. Our results inform an important open empirical question in the healthcare domain related to the value of HIEs, while also joining perspectives from TCE with the IOIS literature to understand the factors that may be relevant to IOIS value creation more generally.

Keywords: Inter-organizational information systems, transaction cost economics, business value of IT, IT and new organizational forms, economics of IS, health information exchange, Medicare